Fed Minutes to offer clues to ‘awkward’ break and hike message

(Bloomberg) — On Wednesday, the Federal Reserve will shed some light on discussions at its June meeting that left Wall Street perplexed.

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The Federal Open Market Committee suspended interest rate hikes after 10 straight moves spanning 15 months, even with inflation cooling slower than expected. At the same time, policymakers forecast two more hikes this year, more than expected, a confusing result that has left investors searching for answers.

The central bank and Chairman Jerome Powell “delivered a confusing message, and I suspect it reflects an uncomfortable compromise between hawks and doves on the committee,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co. The record might give some insight into this, but it might just repeat the clumsy explanation Powell offered.

Powell said Fed officials wanted more time to assess economic data in light of earlier aggressive increases as well as the credit crunch following bank failures in March.

The Fed chief said last week that a strong majority of the committee expects two or more hikes and that he would not rule out hikes in back-to-back meetings. The minutes could reinforce market expectations for a rise in July, said Derek Tang, economist at LH Meyer/Monetary Policy Analytics.

“A hike in July is not a given but pretty close because it becomes harder for them to pretend the hike cycle is still alive if they don’t do two meetings in a row,” he said. . Still, “the minutes will keep as much flexibility as possible: a likely higher peak rate, with a wide range of views on the right timing.”

What Bloomberg Economics says…

“With inflation risks still on the upside, we expect Fed communications to continue to be hawkish ahead of the July 25-26 meeting.”

— Stuart Paul, Chief U.S. Economist

To read the full note, click here

The Fed will receive two key economic reports ahead of the July 25-26 meeting: the June jobs report on Friday and consumer price readings for the same month on July 12.

The personal consumption expenditure price index, which is the Fed’s official target, rose in May at the slowest annual rate in more than two years, Commerce Department figures showed on Friday.

But policymakers have focused more on basic prices, which exclude food and energy. These were up 4.6% from May 2022, compared to 3.8% for the larger gauge.

“The problem is that the economy has continued to beat expectations and inflation has been sticky, which could keep the FOMC in a hawkish stance for some time,” said Rubeela Farooqi, chief economist at High Frequency Economics.

Another key will be the committee’s assessment of loan terms, which are seen as a drag on growth in the wake of bank failures.

“In June, there seemed to be enough lingering concerns to justify waiting to see more information on how things are going,” said Jonathan Millar, senior economist at Barclays Capital Inc. in New York. “But if loan conditions don’t tighten as expected, that would be a good reason to make two more hikes in the next two meetings.”

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